Appropriate for RBI to wait, act with restraint
On the liquidity front, the current buildup in liquidity pressure has been due to a combination of advance tax outflows, coinciding with relatively large government balance. Since we expect this stress in liquidity to be temporary, with the quarter end, the government spending coming on board soon, we were of the view of no CRR cut, which is currently at a multi-decade low. Going forward, in my opinion, RBI is likely to calibrate liquidity conditions in accordance with the spending pattern of the government, by using open market operations.
Here on, we expect the moderation in headline inflation to continue steadily, barring December, with WPI inflation easing to 7.25% by March 2013 (below RBI projection of 7.5%). On other hand, growth shows incipient signs of bottoming out, as also validated by YES BANK demand conditions index.
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